Sandpoint, ID -basedColdwater Creek to open 29 stores

Catalog powerhouse plans 23 full-line retail shops, up to six outlets this year

Coldwater Creek expects retail stores will bring in more than half of its sales in 2005, compared to 7 percent in 2000.

By Addy Hatch

As a retailer, Sandpoint-based Coldwater Creek Inc. was built on catalog sales of its women’s apparel and gift items, with Internet sales added when that electronic medium exploded on the scene.

Now, the North Idaho company is looking to cement its future through brick-and-mortar retail stores.

Coldwater Creek plans to spend $19 million this year to open 23 additional full-line retail stores, and is considering opening another 40 stores next year, Chairman and CEO Dennis Pence said in a conference call with securities analysts earlier this month. The company operated 43 stores, excluding outlet stores, as of Feb. 1, the end of its 2002 fiscal year.

Coldwater Creek also will open four to six outlet stores this year, and will add more such discount stores “on an ongoing basis,” says company spokesman David Gunter. Currently, Coldwater Creek has 14 outlet stores.

By 2005, Coldwater Creek expects that retail stores will bring in more than half of its overall sales, compared with just 7 percent in 2000.

Why fiddle with what’s been mostly a successful formula of concentrating on mail-order sales?

The fact is, women would rather buy their clothing in a store, Gunter says.

“The reasons are fairly intuitive,” he says: “She wants to try it on, she wants to verify the quality. This is still a shopper that likes to go into stores, and we want to be there.”

Women’s apparel is a big market, with an estimated $83.6 billion worth of goods sold each year, but 92 percent of that is sold through retail stores, Gunter says.

“We have approximately a 5 percent market share of what’s being sold” through catalogs and the Internet, he says, which is good, although it’s a 5 percent share of a miniscule piece of the retail pie.

Pence said he believes it’s possible for Coldwater Creek to grab at least a 2.5 percent share of the market for store sales, which would translate to $2 billion a year in business.

“That is a strategic opportunity,” he said.

Gunter says brick-and-mortar retailing is “a more competitive environment, to be sure, but we feel there’s some opportunity there.”

Lifestyle centers

Lauri Brunner, a Minneapolis-based securities analyst with RBC Capital Markets, applauds Coldwater’s retail-store push, saying in a recent report on the publicly traded company that such operations have the potential to be much more profitable than those that rely on catalog or Internet sales.

“The highest operating (profit) margins the company achieved as a pure direct marketer were 7.3 percent in 1997,” she says. “The operating margin potential for a specialty store operation is approximately 20 percent. The company has a long way to go to reach both levels of profitability, but we believe the potential exists.”

She adds that Coldwater Creek in the past has been adept at choosing strong retail locations.

Pence, in the conference call with analysts, said that wherever possible, Coldwater Creek’s new full-line stores will be located in what are called “lifestyle centers,” which are open-air shopping centers, usually in upscale suburban areas. About half of the 23 stores that will open this year will be located in such centers, with most of the rest opening in enclosed malls, he said.

On-street shops will make up a small portion of Coldwater Creek’s future stores, he said. Gunter says the planned new outlet stores will be located “in some of the top outlet malls in the country.”

Brunner says in her report that she believes lifestyle centers are the future of retailing, with customers increasingly choosing to shop “store-to-store, not floor-to-floor,” as they would in a department store.

Coldwater Creek plans to open stores next month in Madison, Wis., and just outside of Nashville, Tenn., Gunter says.

The company’s new full-line stores are smaller than the first stores it opened, and have about 5,200 square feet of floor space compared with up to 10,000 square feet in the original wave.

In addition, Coldwater Creek will test an even smaller format, with 3,500 square feet of space, in three locations—Appleton, Wis.; Peoria, Ill.; and a third location that hasn’t been disclosed, Pence said. If it’s successful, the smaller format could help the company accelerate its rollout of new stores by making it financially feasible to open stores in smaller cities, he said.

To go along with its new emphasis on bricks-and-mortar retailing, Coldwater Creek will decrease its inventory by at least 20 percent, either by offering a smaller assortment of goods or by stocking fewer sizes of particular items.

Stores simply can’t offer as many items and styles as catalogs or Web sites can, Pence said.

As a store retailer, the company will be “far better off going deep with best-selling items and making sure stores have ample inventory” of those items rather than having a limited quantity of a larger number of selections, he said.

Sales up 85 percent

As late as last summer, Coldwater Creek was forecasting that it would open 12 to 14 stores this year. The company bumped up that number based on strong results in its current stores, Pence said.

Sales at Coldwater Creek’s retail stores shot up 85 percent, to $107.5 million, in fiscal 2002 compared with the previous year, although the number of stores the company had open also rose during that time to 43, from 29.

The company doesn’t release same-store sales figures, which compare results for stores open at least a year and are a traditional measure of a retailer’s health. Gunter says the company likely will start releasing those figures in the next two years, when in-store retail sales are a larger part of its business, because currently Coldwater Creek still is “fundamentally a direct retailer.”

Net sales from Coldwater Creek’s “direct” segment, which includes catalog and Internet sales and outlet stores, fell 3 percent, to $365.7 million, in fiscal 2002, from $377.7 million the previous year.

Those sales represented 77.3 percent of Coldwater Creek’s total net sales, compared with 86.7 percent in 2001.

The company posted a fiscal 2002 net profit of $9.4 million, or 58 cents a share, compared with earnings of $3.3 million, or 20 cents a share, the previous year.

Coldwater Creek employs about 3,000 people companywide, after closing its Sandpoint distribution center last year and cutting 120 jobs there and another 100 positions in its retail stores and corporate headquarters.

The company enjoyed success following its 1997 initial public offering of stock, with its share price on the Nasdaq quotation system hitting a high of just over $40 in early 1998.

In late 2000, Coldwater Creek hit a rough patch that it said was caused by a soft economy and some merchandising missteps. The company also said the terrorist attacks of 2001 and continuing economic troubles nationwide have, at times, impacted its results. Currently, Coldwater Creek’s shares, which split three-for-two in January, are trading at about $10.

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